Military Financial Advice - Military Times

Law protects civilian retirement plans for Guard, reserve members

Under the Uniformed Services Employment and Re-employment Rights Act, Guardsmen and reservists have a number of rights to protect them against discrimination from their civilian employers because of their military service.

Employers are obligated to grant leave to workers for active service or training, for example, and must re-employ individuals returning from military service.

However, rights pertaining to retirement plans are less well-known.

Retirement plans, stock ownership plans, awards, severance pay, supplemental employee benefits, vacation, certain seniority-based benefits and health plans must be continued; in the case of health plans, the employee must pay 102 percent of the full premium for absences longer than 30 days.

There are several provisions in USERRA that directly affect retirement benefits and planning. It is important to keep these in mind if you will be deployed for longer periods of time, especially if that deployment is in a combat zone where compensation is tax-free.

These provisions include two that affect pension plans:

Employer contributions. The employee is considered to be continuously employed for the purpose of pension-plan contributions and accrual of benefits under a defined benefit pension plan. When the service member returns from duty and is re-employed, the employer must make retroactive contributions to the pension plan as if the employee had been continuously employed while he was on military leave.

If the employee was mobilized for all of 2005, for example, and the employer contributed 3 percent of his employees’ 2005 salary to a profit-sharing plan, that employer must contribute the same amount to the service member’s plan when he returns from service. The employee’s compensation is based on what he would have received if he had remained in his job.

Employee contributions. The employee can make repayment contributions to his 401(k) plan or any other type of employee contributory plan that could have been made had he not been on active military service. The employee must do so within the shorter of two time periods — either within five years of his date of re-employment or within a period that is three times the length of his military service. If the employer matches contributions for the other employees, then a matching contribution must be made for the employee returning from military service.

These contributions are subject to the limitations of the specific type of contributory plan. If you make a $5,000 contribution to your military Thrift Savings Plan, for example, you cannot contribute more than $10,000 to your employer’s 401(k) plan — for 2006, the maximum contribution to all plans is $15,000. If you are over age 50, you can use the catch-up rules to contribute an additional $5,000 as long as you do not contribute more than 100 percent of your salary.

One planning issue to consider: The Thrift Savings Plan does not match contributions. You may want to save money and make a contribution when you are re-employed that will trigger an employer match.

For example, if you were earning $20,000 from your civilian job and the employer matches your 401(k) contribution up to 5 percent of your pay, consider contributing $1,000 to your 401(k) plan when you return to your old job. This will trigger a matching contribution of $1,000 from the employer. You will have an additional $2,000 in your retirement plan that cost you only $1,000. After you deduct the payment from your taxable income, the out-of-pocket cost is even less.

Under a proposed new regulation, a service member would be able to use his military salary to compute eligibility for employee contributions to a pension plan as long as his military pay did not exceed the salary he would have received if he had continued to work for his previous employer.

Currently, if the employee’s military salary for 2006 is $20,000, for example, and his previous salary is $15,000 and he is under age 50, the maximum combined contribution he can make to the Thrift Savings Plan and employer 401(k) is $15,000.

Exchange-traded funds

In my column in the Nov. 13 issue, I explained how to select, purchase and reinvest with dividend-paying stocks. (Read the column online at www.armytimes.com.) Information on dividend-paying stocks can be found in the quarterly publication Mergent’s Dividend Achievers. I noted I would provide information on exchange-traded funds that contain stocks in the Dividend Achievers list.

Exchange-traded funds are similar to mutual funds, although this type of index fund is bought and sold just like individual stocks.

Four such funds are:

• BlackRock Enhanced Dividend Achievers. Uses option writing.

• PowerShares Dividend Achievers Portfolio. ETF — all 311 stocks in the Dividend Achievers list.

• PowerShares High Growth Dividend Achievers. ETF — high-growth stocks.

• PowerShares International Dividend Achievers. ETF — international stocks.

Check out the performance record of these funds online at www.dividendachievers.com.

Barbara Pietrowski is a licensed certified public accountant, certified financial planner and personal financial specialist. E-mail her at barbarapietrowski@yahoo.com.